Market Softness Will Constrain Margins While Digital Efforts Improve Outlook

Key Takeaways

• Category softness and shifting consumption trends threaten Perrigo's organic growth, with margin pressures from rising costs and retailer consolidation posing longer-term risks.
  
• Strategic portfolio focus and innovation investments support revenue quality, but persistent competition, input cost inflation, and regulatory complexity may hinder sustained earnings growth.
  
• Stagnant consumer demand, competitive pressures, and supply chain uncertainties threaten Perrigo's market share, margins, and ability to achieve sustained earnings growth.

Catalysts

Provides over-the-counter health and wellness solutions in the United States, Europe, and internationally.

• Although Perrigo is benefiting from an aging population and increasing consumer demand for affordable healthcare options, the company faces persistent category softness and uncertain consumption trends in the OTC market, which could constrain organic revenue growth if these trends become structural rather than transitory.
  
• While the shift of consumers toward private label and store brands has accelerated, supporting Perrigo's market share and volume gains, there is a risk that cost pressures and retailer consolidation could erode pricing power and compress gross and net margins over the longer term.
  
• Even as Perrigo's strategic focus and portfolio simplification-highlighted by the sale of the Dermacosmetics unit and reinvestment into core categories-should drive higher-margin, more predictable revenue streams, the slower-than-expected recovery in the infant formula business and volatility from new competitors suggest potential shortfalls in earnings growth if these headwinds persist.
  
• Although investments in digital marketing, demand generation, and enhanced innovation pipelines are beginning to strengthen key franchises like Opill and Jungle Formula, the necessity of higher promotional spend along with increased regulatory compliance and potential tariff-related input cost inflation could offset margin improvements and pressure future operating profits.
  
• While Perrigo's diverse global footprint positions the company to benefit from expanding healthcare access and macro trends in preventive wellness, its significant exposure to European markets leaves it vulnerable to adverse currency movements, regulatory risks, and shifting national preferences toward holistic therapies-all of which may introduce long-term unpredictability to reported sales and earnings.

Perrigo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Perrigo compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Perrigo's revenue will grow by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.4% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach $199.9 million (and earnings per share of $1.45) by about September 2028, up from $-59.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.8x on those 2028 earnings, up from -53.9x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 0.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Perrigo Future Earnings Per Share Growth

Risks

• Ongoing softness in overall consumer demand, particularly in key categories like allergy, Sun Care, and Digestive Health, may indicate a deeper secular trend of consumption stagnation, which threatens Perrigo's ability to drive sustained net sales and earnings growth in future years.
  
• Increased competition and heavy promotional activities in the infant formula market, alongside new product launches and sub-optimal shelf placement, could erode Perrigo's market share and compress margins, pressuring both revenue and operating profit over the long term.
  
• Exposure to retailer consolidation and private-label buyer power, especially as Perrigo relies on large contracts to drive OTC sales in the U.S., could result in heightened pricing pressures, limiting Perrigo's ability to protect net margins as volume shifts occur.
  
• Ongoing importation of European and organic infant formula and the possibility that U.S. regulatory policy continues to allow these imports injects uncertainty into Perrigo's long-term share in infant formula, complicating capital allocation and potentially reducing revenue growth prospects.
  
• Reliance on cost-cutting programs like Project Energize and Supply Chain Reinvention may face diminishing returns, particularly if input cost inflation or further currency volatility materialize, constraining Perrigo's ability to sustain margin and earnings expansion in the out years.

Valuation

• The assumed bearish price target for Perrigo is $27.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Perrigo's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $27.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.5 billion, earnings will come to $199.9 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 7.7%.
• Given the current share price of $23.33, the bearish analyst price target of $27.0 is 13.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.